460 B.R. 520
Bankr. D.N.D.2011Background
- involuntary Chapter 11 case against Keeley & Grabanski Land Partnership (KGLP) filed Dec 6, 2010; related Chapter 11 cases for Grabanski entities and Partnerships; pre-bankruptcy, KGLP owned Lenth and Unruh Parcels with seller-financed loans; G & K Farms had loans from Choice Financial and other lenders; NRCS conservation offer created potential equity; trustee moved to convert under 11 U.S.C. §1112(b); Debtor opposed; court held hearing Sept 8, 2011 and converted to Chapter 7.
- KGLP was formed Feb 1, 2007 by Keeleys and Grabanskis; Lenth Parcel bought Feb 5, 2007 under a 10-year note with balloon; 2008 irrigation equipment lease and payments; Unruh Parcel purchased Jan 4, 2008 with loan terms and 18% post-maturity interest.
- G & K Farms formed Jan 1, 2008 to rent land from KGLP; financing from Choice Financial and United Agri Products; 2010 workout with Choice Financial involving irrigation payments and land-related debt; Texas Family Farms involved as a vehicle for crop proceeds.
- Debtor allegedly misapplied crop proceeds and insurance payments; 2010-2011 alleged mismanagement and failure to provide financial disclosures; Chapter 11 trustee recommended conversion; plan filed without disclosure statement.
- Court granted motion to convert citing substantial and continuing diminution of estate and lack of likelihood of rehabilitation, and deficiencies in debtor’s disclosures and plan.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether cause exists to convert under §1112(b) | Trustee/Choice/Keeleys contend substantial loss and lack of rehabilitation. | Debtor argues ongoing plan viability and unusual circumstances. | Cause exists; mandatory conversion to Chapter 7 appropriate. |
| Whether §1112(b)(4)(A) proven | Evidence shows ongoing deficits and no reasonable rehabilitation. | Debtor disputes sufficiency of evidence of diminution/rehabilitation. | Proven: substantial diminution and no reasonable likelihood of rehabilitation. |
| Whether §1112(b)(4)(E)/(F) filing failures constitute cause | Debtor failed to file schedules/statement of financial affairs as ordered. | Debtor argues information provided elsewhere suffices. | Yes, filing failures constitute cause. |
| Whether §1112(b)(2) exception applies to non-conversion | Debtor cannot show plan likely to confirm timely and cure of omissions. | Debtor claims justification and potential cure. | Exception to mandatory conversion not satisfied; conversion mandatory. |
Key Cases Cited
- In re Miell, 419 B.R. 357 (Bankr.N.D. Iowa 2009) (court holds §1112(b) conversion mandatory absent unusual circumstances when cause shown)
- In re Pittsfield Weaving Co., 393 B.R. 271 (Bankr.D.N.H. 2008) (discusses balancing reorganization goals with creditor interests under 1112)
- United Sav. Ass'n of Tex v. Timbers of Inwood Forest Assocs., Ltd., 808 F.2d 363 (5th Cir. 1987) (recognizes creditors' rights and when reorganization is not possible)